BNZ's fair-value model suggests NZD/AUD will appreciate; USD to be under pressure till June at least

By Mike Jones


A combination of broad-based USD weakness and solid NZD/AUD demand pitched the NZD/USD higher overnight.

The ¾ of a cent gain in the NZD/USD places it smack in the middle of the recent 0.8150-0.8475 range.

Currency traders are slowly filtering back from holiday, but we’re still in an environment where liquidity is a little thin and trading interest is subdued.

Thin trading conditions appear to be responsible for much of the volatility in the NZD/AUD over the past week, including last night’s gain from 0.7920 to 0.7965.

The more fundamental drivers of the cross – interest rate differentials, NZ-AU commodity prices, and relative business confidence ­– are little changed relative to last year.

According to our short-term NZD/AUD valuation model, the combination of these drivers is consistent with a ‘fair-value’ range of 0.8150-0.8350, suggesting the fundamental backdrop remains skewed in favour of NZD/AUD appreciation.

Alongside creeping USD weakness, the gains in the NZD/AUD were enough to lift the NZD/USD back above 0.8350 overnight.

We expect the currency will continue to ping around in the 0.8150-0.8450 range until currency volumes return to normal and local economic data provides investors with a picture of in what shape the NZ economy finished 2012.

There’s very little in the way of important local data this week (just building permits and trade data). The first of the heavyweight releases comes next week with the Q4 QSBO business survey and CPI.

On an otherwise quiet day, keep an eye on today’s Aussie data: trade figures, RBA reserves data, and the construction PMI.

On the day, NZD/USD dips should be limited to around 0.8320.

Initial resistance will be encountered on bounces towards 0.8395.


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The New Year’s rally in ‘risk-sensitive’ assets faltered overnight.

US and European equity markets dipped into the red (even as banking stocks enjoyed solid gains), risk aversion gauges moved higher, commodity prices slipped, and benchmark yields dipped a fraction.

However, the less upbeat sentiment didn’t filter through to FX markets. In a stark departure from the usual correlation between USD and risk appetite, the USD weakened against all of the major currencies, with the high-beta NZD outperforming. The EUR/USD continued to rebound off last week’s 1.3000 lows, climbing ¾ of a cent, to 1.3100.

It’s hard to pinpoint an exact catalyst for these movements in currencies. Volumes are definitely still on the light side, and the data/events schedule is still fairly quiet. This suggests low liquidity and positioning are the bigger drivers, rather than any change in fundamentals.

Still, it may be that investors are in the process of reassessing whether last week’s FOMC minutes really were a fundamental positive for the USD. We certainly think it’s too soon to get bulled up on the greenback. Even if the Fed did decide at some point in 2013 to stop QE, the stock of asset purchases would remain a stimulatory factor and, as the Fed says, its highly accommodative policy will remain “for a considerable time after the asset purchase program ends.”

We expect the USD to remain under pressure through most of H1 2013, with some potential for an end of year rally if bond investors start to anticipate an exit by the Fed from current policy settings as early as 2014 or H1 2015.

In the short-term, the relative strength of tonight’s slug of European data (consumer confidence, retail sales and unemployment) might spur a bit of last minute positioning ahead of Thursday’s more important ECB policy decision. A slow recovery theme is expected to shine through the data. If so, the EUR/USD may be able to extend its gains into the 1.3150/1.3200 region.

Other News:

The Irish government announces a return to public debt markets with a 2017 syndicated bond.

Event Calendar:

7 January: EC Eurozone PPI;

8 January: AU trade balance; EC Eurozone retail sales & consumer confidence; EU German factory orders;

9 January: NZ building permits; AU retail sales; CH CPI, PPI, industrial production & retail sales;

10 January: NZ trade balance; NZ ANZ commodity prices; AU building approvals; UK BoE decision; EU ECB decision; US jobless claims;

11 January: UK industrial production; US trade balance.

All its research is available here.

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